Wilfred Riendeau v. Minister of National Revenue, [1982] CTC 2433, 82 DTC 1412

Guy Tremblay:—This case was heard on November 14, 1979, in the City of Winnipeg, Manitoba. Following the hearing, counsel for both parties tried in vain to arrive at an out-of-court settlement. Finally, they decided to ask for the transcript and send their written submissions. The last document was received by the Board on February 9, 1982. The case was then taken under advisement.

1. The Point at Issue

The issue is whether the appraisal of a farm on Valuation Day was $164,500 as the appellant contends or $95,000 as the respondent contends. The said farm was sold for $208,000 in 1975. The value on the V-Day is therefore very important.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based the assessment or reassessment are also deemed to be correct. In the present case the assumed facts are described in the Reply to Notice of Appeal as follows:

12. In assessing the Appellant, the Respondent made the following assumptions of fact, inter alia:

(a) The appellant acquired the property in question before December 31,1971 ;

(b) During the 1975 taxation year, the Appellant disposed of the said property;

(c) The proceeds of disposition of the said property amounted to $208,000;

(d) 500 December 31, 1971, the fair market value of the said property was $95,000;

(e) The expenses incurred by the Appellant on the disposition of the said property amounted to $8,265;

(f) The portion of the gain considered to be applicable to the Appellant’s residence located on the said property is $5,000;

(g) The reserve in respect of such proceeds of disposition of the said property that are not due to the Appellant until after the end of 1975 amounts to $23,974.76.

3. The Facts

3.01 The subject property is located in the Municipality of Pipestone, in the Province of Manitoba, in sections 1, 27, 35 and 36 of the 8th and 9th township and in the 26th range west of the principal meridian.

3.02 In or about the year 1950, the appellant purchased the said property which then was all virgin land for “something like fifteen thousand” (SN p 5). The property was comprised of 1,200 acres.

3.03 He constructed the following buildings on the land: farm house, one machine shed, three metal granaries, ten other metal granaries in the forms of oil tanks, two frame granaries, four frame barns, one frame shop and one frame garage. The building site is located approximately 15 miles south of Virden. On December 31, 1971, those buildings, according to the appellant’s appraiser, Mr Brawn, had a depreciated value of $56,500. However, according to the respondent’s appraiser, Mr McEwen, the same buildings on the same date had a depreciated value of $53,973 without considering economic obsolescence. In his testimony (SN pp 37 and 38) Mr McEwen said he would be prepared to accept the $56,500 figure given by Mr Brawn. However, according to him, economic obsolescence must be deducted from the said figure. He appraised the economic obsolescence at 40%.

3.04 In his valuation report (Exhibit R-1, page 18), Mr McEwen gives the definition of “economic obsolescence” and the reason for his figure of $21,589:

Economic Obsolescence is the loss in value to the improvements due to locational causes external to the property. During an inspection of the subject property it was noted that many building sites were being left vacant as larger farmers increased their holdings in this part of the province. The subject farm buildings are being utilized and they are better than average for the area. In comparing sales with and without buildings, it has been found that, in the case of grain farms, the buildings contribute very little value. In the case of a mixed farm, such as the subject, the buildings do contribute some value. A study of several (30) farms, which sold in the western part of Manitoba during 1971 and 1972, was completed and the results of this study indicated that where exceptional or specialized buildings existed, these buildings would contribute from 30% to 40% of their value to the total value of the farming unit.

The value which the buildings contribute is dependent on the proximity of the closest town, accessibility, and various other factors which affect value. Since the subject farm site is a considerable distance from Virden, situated on a gravel road, an economic obsolescence factor of 40% is considered reasonable.

Value before Economic Obsolescence —	$53,973
Economic Obsolescence 40%	21,589
Building Value after depreciation from all causes	$32,384

After the admission concerning the figure of $56,500, the computation would be as follows:

3.05 According to Mr McEwen, the method for calculating the economic obsolescence is a generally accepted appraisal technique. It would be part of “Appraisal Course 3, Urban Options” given by the Appraisal Institute (SN p 38). He explained the study that the Department of Revenue did to arrive at 40%:

Q In this particular case you have applied a figure of 40 percent. Could you tell us how you got that?

A Well, the Department completed a study of farm sales throughout the province, and we analyzed, like during 1971 and 1972 we kept track of all sales during 1971 and 1972. But since then in order to arrive at what — this economic obsolescence factor is, each department appraiser was given a number of properties to go out to in various parts of the province to do a complete study of sales with buildings and sales without buildings. And from that study we were able to arrive at certain figures in various parts of the province that indicated economic obsolescence. In many cases it was indicated that the buildings didn't contribute anything to the value of the farm. but then in a lot of cases we were able to come up with a value that the farmers, or the purchasers were prepared to pay in order to get the buildings. And we found that it was always far less than the replacement value, and that difference was calculated as economic obsolescence. I personally was involved in doing the properties down in the Russell area, which is at the west end of the province and just north of the subject, and we came up with 35 to 40 percent for economic obsolescence in the cases of the farms that I did. (SN pp 39 and 40)

3.06 The appraisal of the bare land on V-Day pursuant to the appraiser’s reports is as follows:

Appellant (Brawn’s report) Exhibit A-1

1200 acres at $90 per acre	$108,000
Respondent (McEwen’s report) Exhibit R-1
615 acres Pipestone Clay @ $65 per acre	39,975
349 acres Souris Loam @ $40 per acre	13,960
234 acres Uncultivated @ $30 per acre	7,020
	$ 60,955
Rounded to $61,000

3.07 Each appraiser arrived at his final estimate of value by using a marketdata approach, that is, by analyzing sales of similar income-producing properties and relating them to the subject property.

3.08 From the testimonies and the two appraisers’ reports, there are some points which are not in dispute concerning the bare land on December 31, 1971. They are as follows:

(a) the property is comprised of 1,200 acres;

(b) the cultivated area is 841 acres;

(c) the municipal assessment is $21,000;

(d) the taxes are $1,290.45;

(e) the highest and best use of the subject property is a mixed farming unit, ie a mixed farm and feed lot. This was the use of the subject property on V-Day and at the time of the sale; and,

(f) the subject property is located on land which encompassed two principal classifications of soil, the first being Pipestone Clay and the second being Souris Loamy Fine Sand.

3.09 Concerning the Pipestone Clay, Mr Brawn in his report quotes the following statements made by the Dominion Department of Agriculture and the University of Manitoba:

(a) Pipestone Clay

The Pipestone Soils are of a heavy texture, having a deep black clay surface of dull appearance, sticky when wet, and granular when moist. The typical Pipestone soils are good, highly productive soils, but because of their heavy texture and flat topography they have slow internal drainage. They are excellent for cereal and general farm crops and above the average of the district for the production of grasses and legumes. They are susceptible to drifting in seasons when lack of snow cover permits the soil aggregates to slack down to a very fine granular or pulverescent condition, but from a fertility standpoint these soils must be rated as excellent soils.

Mr Brawn also referred in his argument to a report made by Messrs Ellis and Shafer:

Soils Report No 3 of the Province of Manitoba, prepared by Messrs Ellis and Shafer, first printed in 1935 and reprinted in 1974, at page 34 and the following pages contains a table headed “Summary of the Soil Characteristics, Indicated Land Use, and Soil Problems in Southwestern Manitoba”. This table describes the natural fertility of Pipestone soils as “high” and states that they are suitable for grain and mixed farming with wheat and flax suitable with coarse grains and grasses on the better drained soils and grass and hay crops on the associated wet soils. The report suggests that the soil problems pertaining to Pipestone soils are that there is slow surface drainage due to flat topography and heavy textures, and that the soils are occasionally subject to soil drifting where the clay soils slack down to a powder due to lack of snow cover.

Moreover, there is another kind of soil which is a type of intermediate between the Pipestone Clay and the Souris Loamy Fine Sand. The soil of the subject property would be of that kind (SN pp 69 and 70).

(b) Souris Loamy Fine Sand

The Souris Loamy Fine Sands are very light in texture and have much more feeble soil profile development. Except in abnormally wet seasons they are not well suited to cultivation and particularly for continued arable culture. Because of the moist sub soils however, they can be used for the production of hay and for grazing where the topography is smooth.

The soil, in fact, was developed on lighter textured deposits in the glacial lake Souris Basin.

The Ellis and Shafer report, referred to above, said about the natural fertility of Souris soils:

The better sandy loams were formerly good, but the fertility has been appreciably lowered where organic matter has been reduced by wind or erosion and soil drifting. The lighter textured soils are naturally low in organic matter.

It seems that Souris Loamy Fine Sand is better than another Souris soil called Souris Fine Loamy Sand. The Board, however, did not see the distinction.

3.10 There is also a third category of soil, namely Oxbow. The Ellis and Shafer report describes the relevant categories of Oxbow soils as follows:

1. Natural Fertility — Variable, high in normal position, lower on the knoll position and low where salinized. (A complex of fairly good and poor soils in close association)

2. Suitability for Agricultural Use Indicated — Use depends on smoothness of topography and number of sloughs and stones. Grain and mixed farming on arable land with permanent hay on intermittent sloughs and permanent pasture on stoney areas.

3. Soil Problems — Periodic climate drought aggravated by run-off where knolls are sharp.

The conclusion to be drawn from this information is that Oxbow soils are not of the quality of the Pipestone soils but are considered to be better than Souris soils.

The subject property has no Oxbow soils. However, the parties referred to comparables which were of Oxbow soils.

3.11 Pursuant to Mr McEwen’s report (for the respondent) at 14:

The arable Pipestone Clay portion is composed of 615 acres, the Souris Loamy fine sand arable acreage is 349, and the remaining 234 acres of uncultivated land is considered to be waste.

The latter would be “made up of ravines, creek beds, non-arable sandy land, and prairie grasses.” (p 4 of Mr McEwen’s report). Mr McEwen however annexed to his report a map published by the Department of Agriculture of Manitoba concerning the different types of soils. According to this map, Pipestone soils form by far the greater part of the subject property. The same map is also included in Mr Brawn’s report (for the appellant). The limitation of the subject property on the said map permits the same conclusion. In fact, only one quarter is Souris soil. If one compares those two maps with Exhibit A-2 which is a sketch plan of the subject property, it is clear from them that the buildings are located in the quarter which is Souris soil.

3.12 Fifteen comparables were used by the appraisers (ten by the appellant’s appraiser and five by the respondent’s appraiser, the latter said he looked at about 12 sales) in their market data approach to reach their conclusions concerning the bare land value.

3.13 From his ten comparables, Mr Brawn (appellant’s appraiser) especially retained comparable no 4 “as being the most similar to the subject from the point of view of soil classification, both of them being largely Pipestone Clay” (Exhibit A-1, page 7). The map annexed to the report confirms this contention. This sale, however, was of considerably smaller acreage (314.26 acres) than Mr Riendeau’s property (1,200 acres), but it took place in January 1972. The price of this property was $25,000 ($79.55 per acre). Because of location factors, Mr Brawn adjusted the price of $79.55 per acre to arrive at an adjusted price of $95.46 per acre. Based on this sale, Mr Brawn suggested that the Riendeau Farm supported a value of $90 per acre.

The Board also states that concerning this comparable no 4, the municipal assessment was $8,700 for the 314.26 acres ($27.70 per acre). The municipal assessment of the subject property is $21,000 for 1,200 acres ($17.50 per acre).

3.14 In reaching his conclusion, Mr McEwen (respondent’s appraiser) especially retains sales nos 1, 2 and 4:

Comparable sales 1, 2 and 4 included buildings while sales 3 and 5 did not. Sale 1 is adjacent to the subject property and although it does not have as much cultivated acreage, it is considered to be a good indicator of value. Sale 2 reflects the amount that is being paid for land which is mostly uncultivated. Sales 3 and 5 are sales of farm land, which is mostly under cultivation. Sale 4 is a good indication of the price of land which is mostly Souris Loamy fine sand. On the basis of these sales an estimate of value for the subject land has been arrived at as follows:

615 acres Pipestone Clay @ $65 per acre	$39,975
349 acres Souris Loam @ $40 per acre	13,960
234 acres Uncultivated @ $30 per acre	7,020
	$60,955
Rounded to $61,000

3.15 With respect to the differences between the appraisals as to land values prepared by Messrs Brawn and McEwen, there were three comparable properties used by both:

3.16 Concerning the first common comparable (no 1 of Mr McEwen’s and no 6 of Mr Brawn’s) it was described in the evidence as the “Gabrielle sale” because the farm property was sold to a Ross Gabrielle. The location is the next door farm of the subject property.

Mr McEwen in his report gave the following information (Exhibit R-1, p 8) about the Gabrielle sale:

Sale No 1

Alex M Barre to Maurice R Gabrielle

1,219 acres of which 832 acres are cultivated

There is a set of buildings on NE 25-8-26W.

Sold September 30, 1971 for $50,000 or $41 per acre.

Mainly Souris Loamy Fine Sand.

Soil Capability Rating is Class 4W8 — “W” indicates excess water other than from Flooding and “S” reflects poor moisture holding capacity and salinity.

Crop Insurance Rating — J and H indicating that the land has a fairly high risk factor for crop insurance purposes.

Moreover on page 13 of Exhibit R-1, he stated that the price per acre under cultivation was $60.

In rebutted evidence, Mr Ross Gabrielle was called on behalf of Mr Rien- deau. He said that on the farm there was a “small house and an old barn and a storage shed 40 by 80” (SN p 119).

He originally signed the papers in February 1971 to buy the property for $65,000 including the buildings (SN p 120). However, the agreement was subject to obtaining financing from the Manitoba Agricultural Credit Corporation (MACC). The latter did not agree to lend Mr Gabrielle the $65,000. Therefore he offered Mr Barre the sum of $50,000 which was the amount the MACC was prepared to lend him. This figure was accepted. Mr Barre indeed wanted to quit farming and stated that neither of his two sons wished to acquire the land.

He also said during chief and cross examination that when he took possession of the land, the number of acres under cultivation was between 380 to 390. He broke up about 450 acres of land during the years 1971 and 1972. He had his 1972 permit issued on August 1, 1972, by the Canadian Wheat Board for 832 acres under cultivation (SN p 124).

According to Mr Gabrielle, his soil was of a poorer quality than the soil contained on Mr Riendeau’s property (SN pp 127 and 128). Because there were only 384 acres under cultivation the price per such acre was $130 and not $60.

3.17 Concerning the second common comparable (no 4 of Mr McEwen’s and no 9 of Mr Brawn’s), the Judd sale, Mr McEwen gave the following information in his report (Exhibit R-1, p 11):

Sale No 4

Douglas P Wardman to David J Judd

477.93 acres of which 417 acres are cultivated.

Set of farm buildings included in this sale.

Sold April 30, 1971 for $15,000 or $31 per acre.

All Souris Loamy Fine Sand.

Soil Capability Rating — Class 4S indicating low moisture holding capacity and salinity.

Crop Insurance Rating — J indicating a fairly high risk factor for Crop Insurance purposes.

Mr McEwen suggested that this comparable was a good indicator of the value of the Souris soil (SN p 50).

Mr Gabrielle, however, who personally knew Mr Wardman said “he wasn't cut out to be a farmer”. Mr Wardman did not have the usual equipment which a normal farmer would necessariy have to run the land. The buildings on the property were only in “just fair” condition in 1971 (SN p 129).

3.18 Concerning the third common comparable (no 3 of Mr McEwen’s and no 8 of Mr Brawn’s) the Podobni sale, Mr McEwen gave the following information in his report (Exhibit R-1, p 10):

Sale No 3

William Kotylak to Paul Podobni

305.52 acres of which 268 acres are cultivated.

Two grain storage tanks included in the sale.

Sold June 30, 1971 for $14,000 or $46 per acre.

All Oxbow Loam to Clay Loam.

Soil Capability Rating — 50% Class 2

20% Class 3

30% Class 5

Limitations in above classes are caused by two or more adverse characteristics which singly are not serious enough to affect the class rating.

Crop Insurance Rating — E which is the best rating in the municipality for crop insurance purposes.

Moreover on page 13 of his report (Exhibit R-1), Mr McEwen contends that the cultivated area is 268 acres, and therefore that the price per such acre is $52.

The Board states that despite the soil whcih is “all oxbow loam to clay loam”, the crop insurance rating is E which is the best rating in the municipality for crop insurance purposes. One can make the same statement about sale no 5 (James Steele). The soil is also “oxbow loam to clay loam” and the crop insurance rating is E. The acreage is 320 of which 245 is cultivated. The consideration per acre is $52 and $67 per cultivated acre.

3.19 Concerning sale no 4 of Mr Brawn’s report (which is the main sale on which Mr Brawn based his conclusion) Mr McEwen said, under chief examination, he had not used it because it was a non arm’s-length sale. The vendor, Mrs Elizabeth Grant, was indeed the mother of the purchaser, Mr William Grant. Concerning the buildings on the property, Mr McEwen said the residence, a one and three-quarter storey building (a floor plan shows 904 square feet with an attached verandah of 256 square feet) was build in 1910. Moreover, there was a machine shed built in 1952, ten circular steel granaries, a workshop, six wood granaries, two housing areas, a completely constructed bale shelter, a seed plant building, a car garage and a couple of old sheds (SN pp 52 and 53). All those buildings had an economical value of $32,095 after physical depreciation and before economic obsolescence. The witness said again that the whole property was sold for $25,000 (SN p 54). The soil is superior to the subject property because “it’s prime pipestone clay” and “no souris at all” (SN p 53).

Under cross-examination, however, Mr McEwen admitted that “the real property assessment on those acres was significantly higher than virtually every other acreage in the area except for the subject property” (SN p 56). The witness also admitted that in a non-arm’s length transaction of this nature there is an element of gift in favour of the purchaser (SN p 57). However, the purchaser would have told Mr McEwen that he thought he had paid the fair market value. He even said in chief examination that “obviously the buildings were worth more than what they paid for both land and buildings, so it is not a reasonable sale” (SN p 54).

It is important to say that this sale was completed in January 1972. For the acreage of 314.26, the total municipal assessment was $8,700, the price per acre was $79.55, the A/S ratio was 2.87.

3.20 Mr McEwen also testified concerning the price of sales around 1970 and 1971, “I think it is generally conceded that there was a slight downward trend in 1968 and 1969 to 1971”. The main factors for explaining this were:

(a) the farmers’ inability to market their grain; and as a result (b) the low price of grain at that time.

In 1973, however, the Wheat Board “stepped in and guaranteed the farmers a fixed price, and this almost doubled the price they had been getting for grain” and “this very soon was reflected in the price of land”. The witness referred to the Crop Insurance Book (SN pp 42 and 43). However, according to a publication of the Province of Manitoba the value of farmland (buildings included) in Manitoba Crop Reporting District No 7 (Virden) where the municipality of Pipestone is located is as follows:

4. Law — Case at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved are sections 3, 38, 39 and 40. they shall be quoted if necessary during the Analysis.

4.02 Case at Law

The only case referred to the Board by the parties is the decision of President Jackett in National Capital Commission v Marcus, [1969] 1 Ex CR 327.

4.03 Analysis

4.03.1 As the counsel for the appellant points out in his submission concerning the valuation of bare land:

The differences in the appraisals seem to arise because of three basic factors, namely:

(a) The quantity of land included in the relevant soil classifications, and the consequent quality thereof;

(b) The amount of land under cultivation in certain of the comparables; and

(c) The relevance of certain comparable sales.

4.03.2 Concerning the first difference, “the quantity of land included in the relevant soil classifications, and the consequent quality thereof”, (para 4.03.1(a)) the evidence is to the effect that the greatest part of the subject land is composed of arable pipestone clay. However, it is admitted that the land has been classified as something between the Souris Loamy Fine Sand and the Pipestone Clay. Two maps indeed, annexed to the two appraisers’ reports, Exhibits R-1 and A-1, confirm the opinion of the appellant’s appraiser. The respondent’s appraiser, Mr McEwen did not explain in his testimony how he computed the different portions of acreage stipulated in his report (see para 3.11 of The Facts).

4.03.3 Concerning the second difference, “the amount of land under cultivation in certain of the comparables” (para 4.03.1(b)), the evidence established that in one of the main comparables, the “Gabrielle sale”, the number of acres under cultivation was 384 and not 832 as contended by the respondent. When Mr Gabrielle took possession of the farm he himself indeed broke up the land in 1971 and 1972. Therefore the price per cultivated acre is not $60 as Mr McEwen contended (Exhibit R-1, page 13), but $130 per acre (para 3.16).

4.03.4 Concerning the third difference, “the relevance of certain comparable sales” (para 4.03.1(c)), the Board states that in fact the appellant’s appraiser bases his opinion only on two sales, the Gabrielle and Grant sales. The Grant sale was not retained by Mr McEwen because it was a non-arm’s- length sale. However, Mr McEwen admitted that the price paid ($25,000) was lower than the actual value. He said that “the buildings were worth more than what they paid for both land and buildings ...” (para 3.19 of The Facts). As the value of the buildings after the depreciation and before the economic obsolescence is $32,095, this means after the above affirmation of Mr McEwen that even after economic obsolescence the buildings were worth more than $25,000, nothing was paid for the bare land.

It is interesting to state that the property purchased by James Steele on May 31, 1972 (no 5 of Mr McEwen’s) which has no buildings and has an acreage of 320 (245 of which are cultivated), is quite similar to the 314 acres of the Grant sale. The price for this Steele sale was $16,500, $52 per acre and $67 per cultivated acre.

It seems it would be equitable to accept the price of $16,500 for the bare land of the Grant property and this would give around $40,000 ($16,500 plus more than $25,000) for land and buildings which is about $127 per acre (cultivated and not cultivated). Now let us consider the adjustment made in plus of 20%, not contradicted, for location made by Mr Brawn. However, an adjustment must be made in minus. Indeed the soil of the Grant property is superior to the soil of the subject property because it is prime pipestone clay and no souris at all (para 3.19). Moreover the acreage of the Grant property is only /4 of the acreage of the subject property’s 1,200.

The Board thinks that this adjustment in minus can also be 25%. If one considers the buildings on the subject property (para 3.03) and the buildings on the Grant property (para 3.19), the only difference seems that they are less numerous and probably older than those of the subject property. An adjustment in plus of 5% would seem equitable. Therefore after considering all those adjustments, the value is established at $127 per acre (cultivated and not cultivated).

4.03.5 Concerning the Gabrielle property the evidence is that the cultivated acres were 384 and not 832 (this increases the price from $60 to $130 per cultivated acre), and therefore it is clear that this could influence the price of the purchaser. Moreover, originally the tender was $65,000. However, the price was reduced because the MACC would lend him only $50,000 for this farm. This may be an indication that the tender of $65,000 was too high for this farm or that MACC funds were not available at that time. The soil of the Gabrielle property is poorer than that of the subject property (see Exhibit R-1 and para 3.16). Moreover, there is no comparison between the buildings on the Gabrielle property (a small house, an old barn and a storage shed) and the buildings on the subject property (see para 3.03).

The Board thinks that an adjustment of 15% in plus must be made for the soil (5%) and the buildings (10%). This increases the price per cultivated acre to $149.50 rounded out to $150. Because of the location (next door farm) and the acreage (1,219 and 1,200), the Board thinks that the Gabrielle property is the best comparable in the present case.

4.03.6 Considering that all of the comparables retained by the two appraisers include the sale of buildings;

Considering that the evidence is to the effect that the greatest part of the subject has not Prime Pipestone Soil, but a soil which is intermediary between Prime Pipestone Clay and Souris Soil:

Considering that this soil is better than the soil of the Gabrielle property;

Considering that the buildings of the subject property are far better than those of the Gabrielle property;

Considering that the subject property has 841 acres under cultivation which is far greater than the cultivated acres of the other comparables; and,

Considering that the Gabrielle property can be considered at $150 per cultivated acre; the Board thinks that the amount of $126,150 (841 150) seems to be a reasonable value for the land and buildings of the subject property on December 31, 1971.

4.03.7 Considering that the value of the buildings after the normal depreciation can be considered as equitable at $56,500 by both parties; and

Considering that the preponderance of the evidence concerning the obsolescence of 40% is in favour of the respondent’s thesis; the Board thinks that the value of the buildings is $33,900 ($56,500 - $22,600).

4.03.8 As the final result the Board’s decision is:

5. Conclusion

The appeal is allowed in part and the matter is referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.